You Can't Soak the Rich

The Wall Street Journal ^ | May 20, 2008 | David Ranson

[ReleaseTheHounds]

Kurt Hauser is a San Francisco investment economist who, 15 years ago, published fresh and eye-opening data about the federal tax system. His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues. I think his discovery deserves to be called Hauser's Law, because it is as central to the economics of taxation as Boyle's Law is to the physics of gases. Yet economists and policy makers are barely aware of it.

Like science, economics advances as verifiable patterns are recognized and codified. But economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example. ...

Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

[ReleaseTheHounds]

This article -- and Mr. Hauser's graph -- should be required reading for every adult in this country, especially anyone planning to vote in any election this November. I'm sure Paul Krugman's head is exploding as he tries to take in the message in this tight little article.

[AntiKev]

Yeah but if everyone read it, how many would understand it.

[Principled]

Interesting that this makes the light of day.

[reformedliberal]

Even if they could understand it, would they believe it?

[AntiKev]

And if they believed it, would they act on it, or continue along on the same path?

[MrB]

I’ve put the stats in front of liberals that I know, and the response I got WAS “I don’t believe your numbers”.

There’s another facet to it, as well.

Liberals don’t see taxation primarily as a means to get revenue into the government. Obama stated as much. It’s a matter of imposing their definition of “fairness”.

[Always Right]

The problem is, tax policies such as Obama's don't even soak the rich. What high tax on income does is prevent the poor/middle class from becoming rich. I would call Obama's plan more accurately, "The Rich Prevention Act". The rich already have their money, it is the poor folk who need income to get rich. Under Obama's plan of taking the cap off SS and Medicare tax, plus rising the tax rates, he would move the effective tax rate on anything over $200K to about 66% once state taxes are factored in. That means to become a millionaire under Obama, the poor would have to actually make over $3 million.

[workerbee]

Like so many things, it’s the issue the politicians want, not the solution.

[MrB]

That IS the goal. When people are able to build wealth, they become more independent. Leftists hate that idea.

[Oldexpat]

Obama thinks it is only “fair” to raise the capital gains tax, even if there is no new revenue.
This idiot will get us all poor..

[Tulane]

Great article. This is what Republicans need to get back to... a message of lower taxes, less spending, BACKED UP BY THE STATISTICS.

[Attention Surplus Disorder]

“Liberals don’t see taxation primarily as a means to get revenue into the government. Obama stated as much. It’s a matter of imposing their definition of “fairness”.”

I think you’re exactly, precisely correct, it’s a means of imposing a vague “societal justice”, and typically suggested without the slightest concern as to the real-world effects.

[Mr. Mojo]

Obama’s (and the Democrats’ in general) idea of “the rich” is anyone making over $40K/yr. The tax hikes will hurt people across most of the income spectrum. ...in a big way.

[absalom01]

Required reading indeed. So, on average, we’re all working one day a week for the feds...way too much, I say.

[MrB]

It's "smiley face fascism":

[ReleaseTheHounds]

Do you remember President Reagan going on national TV in the evening and telling the American people what his policies (Reaganomics) intended to do — and his charts pointing to the future when economic growth would turn the tide on the deficits?

Boy, do we miss him!

Instead, we have Algore’s alarmist slideshows and John McCain echoing that false message.

[SamuraiScot]

just as medieval science was poisoned by religious doctrine

A couple of fist-fights does not make a war. Medieval science—that is to say, science—was created by religious doctrine. That doctrine would be Christianity, building on the doctrines of Judaism and the philosophy of certain Greek geniuses such as Aristotle.

Briefly, in contrast to the pagan view that the world is run by capricious gods, the Christian view has always been that the universe is a place obedient to laws written by a loving God, and that truth is absolute and discoverable by man. There's a reason why the fathers of modern science, such as Copernicus (cosmology) and Mendel (genetics), were priests.

I'll read the jump, and trust that the rest of the article is better informed.

[A message]

Liberals don’t see taxation primarily as a means to get revenue into the government. Obama stated as much. It’s a matter of imposing their definition of “fairness”.

You are correct.

[Man50D]

What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue.

I'm not an economist and I don't play one on TV but if memory serves me correctly from my college economy classes there is a basic principle that raising the price of a good will increase revenue to a certain point. That point is the break even point. Raising the rate beyond the break even point will result in a corresponding decrease in demand and therefore revenue.

It seems as though the Hauser Law follows this same principle. Taxes are increased beyond people's ability to pay. Consequently tax collection is less. This applies at least somewhat to Alexander Hamilton's observation about collecting a taxes in his Federalist paper #21 even though he was referring specifically to a consumption tax. To quote:

"If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds."

The problem with the income tax is this break even point is far less transparent with the income tax making it more difficult to determine when taxes become excessive because it gives the select few who run the government too much power to set the tax rate. The Fair Tax will be far more transparent by showing the actual rate to the taxpayer with every purchase and will give the people much more power and freedom over \Congress by enabling the people to determine what is the proper amount of tax to be collected. Fair Tax ping!

[Kozak]

Remember Obama admitted that higher capital gains might lead to less revenue, but wanted higher rates anyway for “fairness”.